Don't Stress, Bank Stocks Should Raise Their Dividends – Forbes

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The 2017 investing narrative has many characters. Depending on your portfolio, some of the major characters might be your favorite heroes, an unwanted villain or something in between. So far, technology stocks are proving to be the best performers, whereas retail stocks are hitting a relatively rough patch. Still, we have only finished the first half of the year, leaving much time for characters to develop. Bank stocks seem to be emerging as the main characters as we enter the season of stress tests.

Comprehensive Capital Analysis and Review (CCAR), also known as stress testing, was introduced by the Dodd-Frank Act as a result of the Great Recession. Banks with total assets of more than $10 billion are required by the Federal Reserve to undergo stress tests. This protocol evaluates the bank’s ability to continue operating and lending during times of market pressure or potential downturns, in a coordinated effort to minimize the possibility of bailouts. This week, 34 banks will complete stress tests to reveal their financial health. This critical period determines the fate of capital distributions, buybacks and most importantly, dividends, as the test results reveal the health of the big banks.

As a firm focused on dividend growth investment solutions, Reality Shares has been closely watching forecasted dividend momentum surrounding stress testing for its heavy impact on the overall market dividend growth rate. Should a well-established bank face bankruptcy during a downturn, it can heavily burden the overall banking industry, putting pressure on other banks like we saw during the financial crisis – something the stress tests are designed to prevent. A failed stress test can mean a rejected dividend increase, and bad news for investors. This letdown can upset investors, inhibit shareholder confidence, and ultimately depress a bank’s stock price. As such, dividend growth investors analyze the probabilities of the passing grades of these stress tests.

Dividend Growth Has More Room to Run

Though the S&P 500 has already hit a dividend growth milestone this year, there is still room for growth. Reality Shares research has found that 13 banks undergoing stress tests still pay dividends lower than their pre-recession levels. This group includes industry giants such as Citigroup, Bank of America and the Bank of New York. If these banks exhibit their improvement since the crisis by successfully passing the stress tests, they will each be approved for their respective dividend increases, and will likely elect to raise payouts shortly thereafter. On average, dividend increases are estimated to reach 17.5% after stress tests, according to Bloomberg. This adds more support to the idea that the dividend growth rate has more room to grow.

Of the banks undergoing testing, 12 are expected to announce dividend increases after test results are released. If these 12 stocks increase dividends by only as low as the most conservative expectations, the aggregate dividend of the S&P 500 can jump over 0.5% (52 basis points). An increase of just 10 basis points can be considered significant, making this dividend increase a very nice boon for dividend investors.

Don’t Stress, Use DIVCON®

Our research and strategies revolve around the total return power dividend growth can potentially generate. We created DIVCON® to forecast the dividend growth potential of any dividend-paying stock within the next 12 months. By utilizing DIVCON to evaluate companies for their true financial health, investors can seek to filter and invest in the highest quality stocks with a true underlying quality and strong long-term total return prospects based on solid fundamentals. DIVCON is also easy to understand – after analysis, it assigns an overarching score to each dividend paying stock on a scale of 1-5, with 5 representing the absolute highest likelihood to raise its dividend.